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JERRY REISS. A.S.A.

ENROLLED ACTUARY

2880 W. Oakland Pk. Blvd., Ste 105

Fort Lauderdale, FL 33311

(954) 733-9656

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                                                                                                                   Happy New Year

Vol. 4 No. 1

January 1, 2004

Re: Identifying & Quantifying Profession Exposure


Dear Family Law Attorney:


This is a two-part newsletter. Part 1 deals with the legal issues over which attorneys face professional exposure on property valuation issues. Part 2, to be published next month, Vol. 4 No. 2, helps identify those issues and quantify the exposure for the reader.


Many attorneys recognize that dividing pensions with a QDRO involves considerable professional exposure and have elected to avoid drafting them. However, when an error occurs from a drafted QDRO, chances are extremely likely that the error will trace back to a valuation issue that was not addressed, because the attorney determined incorrectly that complex valuations could be avoided if the benefit is divided with a QDRO. This perception is so widespread that it alone will account for the greatest number of malpractice cases that the 21st century family law attorney will face.1 The Connecticut Supreme Court case of Grayson v. Wofsey, 646 A.2d 195 (Conn. 1994), not only makes this forecast likely, the aftermath of its ruling can be seen with devastating consequences in both Connecticut and the states that have since had similar rulings. As valuations form the core of this liability, the next newsletter will devote an entire section to showing why a valuation must be done before the benefit is divided, and why it must be done before the court ruling or settlement agreement is entered.


Grayson stands for a very simple proposition: A client who settles a case in which his or her attorney had not provided contrary advice, can infer that the attorney agrees that the offer is reasonable. If the attorney has no basis to support it, the client is not prevented from later suing the attorney. The Grayson type rulings also dismiss the legal defense of collateral estoppel as a valid basis. The Grayson principle was recognized here in Florida four years before the Connecticut Supreme Court ruling of 1994. In Bill Branch Chevrolet, Inc. v. Burnett, 555 So.2d 455 (Fla. 2nd DCA 1990), the Grayson concept is applied to client losses involving a common law complaint. Grayson not only expands the Bill Branch Chevrolet, Inc., concept/ruling to equity based decisions, it cites Bill Branch Chevrolet as support. It is therefore not difficult to predict that the snowball effect it has had in numerous other states will eventually come full circle back to Florida.


We begin this topic with the Fourth District Court Ruling of Tarleton v. Arnstein & Lehr, 719 So.2d 325 (1998), which involves a divorce and a settlement agreement. Footnote 1 of that opinion cites 3 conditions that must be met for the plaintiff wife to maintain a successful malpractice action. They include: (1) The attorney defendant was retained by the plaintiff; (2) The same attorney neglected a reasonable duty; and (3) The attorney’s negligence resulting in and was the proximate cause of the loss. The Tarelton husband and wife entered into a contract for transactions involving businesses that each operated. The husband breached the contract. The wife was assured by her counsel that she could sue on a breach of contract after the dissolution of the marriage. She was further advised to enter a settlement agreement dividing all property interests.


As there were no disputes that the first two conditions were automatically satisfied, the controversy evolved around issue (3) above. The defendant argued that the former wife failed her burden because she did not present evidence of a cause and effect to the jury. In relying on Helmbrecht v St. Paul Insurance Co., 362 N.W. 2d 118 (Wis. 1984), the Fourth District ruled with the former wife. It found that a divorce action is different, wherein all of the underlying facts of the divorce are presented as evidence to the jury. The jury may substitute its wisdom for whether a judge presented with all the underlying facts would have more likely than not awarded the wife more property. (See Goodings v. Univ. Hosp. Bldg., Inc., 455 So. 2d 1015, 1018 (Fla. 1984)). This ruling also dismisses comparative fault as a method of discounting the exposure that the attorney faces. Concentrate on the principles of this ruling, because I intend to take the reader on an uncomfortable ride, exposing along the way the common practices producing exposure.


Part II of this topic, provides every day examples showing (among other things) why it is malpractice to divide pensions with a QDRO when a competent valuation was not performed before the parties enter a settlement agreement and/or try the property issues in court. Oftentimes these issues are valued by less than qualified “experts”. The question is then presented, how can one prevail on a malpractice claim resulting from the employment of an incompetent expert when the courts routinely accept and qualify these expert opinions? Consider the following:


Congress licensed actuaries under ERISA (Enrolled Actuaries) as the only persons able to select assumptions for purposes of valuing the underlying liabilities that accrued benefits pose for employer-sponsors of the retirement plans. (See, 29 USCA §1023(a)(4)(B), 29 USCA §1082, 29 USCA §§ 1241-1242, 29 USCA §1393, 20 USCA §901, 41 FR 2080 as amended by 42 FR 39200). The Florida Statutes limit this practice to actuaries for valuing automobile liability of the insured (See, F.S. 624.442(1) and (3)(a)). They impose the same restrictions for self-funded health and welfare plans adopted by Florida municipalities (See, F.S. 627.6699(3)(a), 3(f)(6), 3(h)(1) and (2)). These restrictions also apply to HMO’s doing business in this state (See, F.S. 641.26(1)(f)(1) through (3). They apply to insured and uninsured workers compensation plans (See, F.S. 627. 211(1) and (3)(2)). Naturally, these restrictions apply to all retirement plans of the FRS and municipalities, as well as the elected official plans. (See, F.S. 627.311(24)(d)(1)); Florida Constitution, Article X @ 14; also see legislative intent codified at F.S. 112.61 and Branca v. City of Miramar, 634 So. 2d 604 (Fla. 1994). In fact, actuarial certification is required in all of the above plans showing that the liabilities have been calculated with sound actuarial principles. (Id.). 


When it comes specifically to retirement plans, an actuary is defined by Florida law as someone who is both an enrolled actuary, and either a member of the Society of Actuaries or of the American Academy of Actuaries. (See, F.S. 112.625(1)(f)(3)). Finally, actuaries are licensed under federal law to draft plan documents for retirement plans. They are also licensed by Congress and required under regulations (IRS, DOL and PGBC) to interpret laws to do a proper valuation. The Florida Bar sought to limit the practice of both in 1990 when powerful interests (certain lawyers) became concerned about protecting their interests. 


The Florida Supreme Court found actuaries uniquely qualified to do both things. (See Florida Bar re: Advisory Opinion – Nonlawyer Preparation of Pension Plans, 571 So.2d 430 (Fla. 1990).) In coming to this conclusion, it did not take the issue of the Florida Unauthorized Practice of Law Statute lightly. It had once before ruled in favor of the Florida Bar on a similar federal licensing issue in 1963 and was reversed by the United States Supreme Court. (See Sperry v. Florida Ex Rel, Florida Bar 373 U.S. 379 (1963).) Now, do you still believe that the attorney can hide behind the low standards when Congress, the Florida Constitution, the Florida Statutes, and legislative intent specifically restricts these valuation issues to actuaries? In fact, at the same time that the statutes limit these services to qualified actuaries, the same statutes empower the CPA to only conduct an audit of the funds designed to meet the liabilities. In other words, the statutory scheme in Florida is to limit the services of the CPA to certification of the accuracy of the amount of available funds and nothing more. The CPA is similarly restricted on pension valuation matters in ERISA.


Next, we explore the liability associated with failure to recommend a competent actuarial valuation and proceed from the assumption that the valuation can be avoided if the assets are divided with a QDRO. While numerous specific examples in the next newsletter show that the extent of exposure is frequent and considerable with this assumption, the issue that we concentrate on in this newsletter is limited to its legal incorrectness.


F.S. 61.075(3) requires a valuation of significant marital assets. The trial court will routinely reverse a trial finding that did not incorporate a value for a retirement plan under 61.075(3) (See Haydu v. Haydu, 591 So.2d 655 (Fla. 1st DCA 1991); Barnes v. Barnes, 592 So.2d 1260 (Fla. 5th DCA 1992); Levitt v. Levitt, 592 So. 2d 253 (Fla. 2nd DCA 1991); Hatcher v. Hatcher, 533 So. 2d 917 (Fla.2nd DCA 1988); Moon v. Moon, 594 So.2d 819 (Fla. 1st DCA 1992); Criswell v. Criswell, 589 So.2d 427 (Fla. 1st DCA 1991); Mullen v. Mullen, 825 So.2d 1078 (Fla.4th DCA 2002). In each of these cases, the principle is that it is impossible to determine the reasonableness of the property division when a substantial asset has not been valued. In addition, income tax affecting as a valuation issue also requires reversing and remanding when evidence was presented as to its affect and the court failed to factor it into the division. (See Vaccaro v. Vaccaro, 677 So.2d 918 (Fla. 5th DCA 1996); and Calamore v. Calamore, 555 So.2d 1302 (Fla 4th DCA 1990). The principle here is identical. Therefore, while F.S. 61.075(3) would appear not to apply to property divisions agreed to by the parties, the rulings that have found that it is impossible to determine the fairness of a division without a valuation of substantial assets does apply.


Before visiting with other case law, I would like to tell the reader about a case that I had back in 1998. It was one of many through the years where I had been approached about a serious error that a family law attorney had committed. This one was a Fort Lauderdale case. I was also approached on another involving a Bradenton attorney one day before I addressed the Tampa Family Law Section.


In the Fort Lauderdale case, I was employed to help determine if we could assist our client who was unhappy about a property division that her father entered into with her step- mother. The client, who lived in Connecticut, was the wife of a practicing attorney there. She provided this Fort Lauderdale attorney with a $50,000 retainer.


Her father, a retired executive from Bristol Myers, has almost $4 million dollar when he quit. Roughly half of it was retirement perks and retirement bonuses that he was paid. At the time of his retirement, he was married to his then spouse for but a few years. At the time of divorce, he was married about fifteen years. Following retirement, he acquired Alzheimer’s disease. Our client, his daughter, was upset about the money that her former stepmother received at the divorce and feared that she married him only to systematically clean his clock. By 1998, the disease had advanced to a progressive stage and he was in a hospital/living assistance arrangement. He was also unable to continue with the care because he lacked sufficient funds.


On the surface, the division seemed horribly unfair. There was evidence that after the marriage was dissolved, the former wife actually stole money from her father by forging his name to documents. That evidence was provided to her original attorney and he failed to do anything about it. It was also provided to the police who also did nothing about it. Her father also protested at the time of the settlement that he did not like what was offered and did not want to agree to it. Although her worst fears seemed supported by the evidence, first impressions of our client made people wonder if she was not mentally ill. She was very upset about everything and exhibited a very high strung personality.


The attorney that she hired and in turn, who hired me to assist, believed that if he could show that the agreement was unfair on its face and reached by deceit that he could get it vacated. Although I had absolutely no experience in the matter in 1998, his reasoning seemed faulty. To be sure, I contacted Matt Miller, whom I had known since 1994, to discuss the matter with him. Matt, who is not only a brilliant attorney, is also an excellent teacher, and in five minutes of his time he made me understand the distinction between extrinsic and intrinsic fraud. Having digested the matter, I concluded that while we could show that fraud had been committed, the nature of the fraud was intrinsic and the one-year time limit for intrinsic fraud claims had long since passed. In fact, the attorney had taken the $50,000 retainer almost 18 months before he even hired me to assist and another 18 months after her father’s divorce.


I informed the attorney of my conclusions and advised him that I would like to investigate the matter to see if our client had a malpractice claim against her first attorney. The attorney who retained me was her father’s third. I already knew that most of the property was non-marital and that the original attorney got his client to enter an agreement without a valuation of property. I strongly suspected that malpractice had occurred. I also recommended that we employ a good CPA to assist us (and recommended the name of one) with tracing the wife’s finances, who was accused by my client of stealing marital funds and laundering it with her relatives in England (over an eight year period).


My conclusions showed that the recommended division of property was faulty in that the wife received $750,000 more than she was entitled to receive. The CPA’s investigation concluded that there was likely several hundred thousand dollars more funds diverted during the marriage; however, we could only satisfy a more likely than not standard of proof. We had the disappearance of funds and a former husband who was no use as a witness to support our suspicions because he suffered from advanced stages of the disease. We needed solid proof to open a settlement under a false financial affidavit claim. Yet the malpractice case was a good one. We could easily satisfy the Grayson criteria, but we had so much more. I uncovered a letter written by his attorney to his daughter. In it, the attorney acknowledges that she did not want a public record created declaring her father incompetent, but complains in the same letter that her father was unreasonable and unwilling to settle. He further advises her that he could not proceed to trial because the progressive stage that her father reached rendered him incompetent. He therefore strongly admonishes the daughter that if she could not influence her father to accept the terms of the proposed agreement, that he would have no choice but to have him declared incompetent and have a guardian ad litem appointed to represent his interests. WOW, this attorney acknowledge in writing that his client was incompetent to enter a contract, but none-the-less brought pressure to bear to make him do so. Also, an attorney cannot escape malpractice by coercion and intimidation into settlement. This is clear malpractice. (See Lownan v. Karp, 476 N.W.2d 428 (Mich.App.Ct. 1996) After discovering the letter, I kept encouraging the attorney to consult with a Miami attorney whom I knew, who was board certified in family law and who had testified before in malpractice cases. Unfortunately, many months had passed before I could get the attorney who retained me to move.


We had several conferences with this malpractice attorney/witness, who agreed with my assessment of the malpractice exposure. In our last conference, certain facts came to light that revealed that the attorney who retained me allowed the statute of limitations to pass, as evidenced by certain actions that had been taken. The two-year statute tolls from when you first discover or should have discovered the error. The malpractice attorney advised the attorney who retained me that he has significant malpractice exposure himself. The result: He terminated the relationship with the Connecticut client, and refunded her the unused portion of his retainer. What this attorney does in response to learning that he had created exposure for himself is the very reason that the Grayson line of rulings dismisses collateral estoppel as a defense to legal malpractice.


The Tampa case is only more of the same. Folks, the malpractice concern should be greater than you know. Your exposure likelihood is ostensibly with valuations. Here is other case law to support this claim.


The theory often used to defend against a settlement is collateral estoppel. Attorneys often argue that the purpose of settlement is to promote finality and that a client cannot agree to a settlement, benefit from it, and later attack it. The sole ruling that seems to support this position is a Pennsylvania Supreme Court decision. (See Muhammed v. Straussberg, 578 A.2d 1346 (Pa. 1991); and Meyer v. Wagner, 709 NE 2d at p. 791 (Mass. 1999), citing Muhammed as the sole sister state ruling that disagreed with it). Other courts appear to uniformly reject this position on public policy grounds. The Illinois decision of McCarthy v. Pedersen & Houpt, 621 N.E. 2d 97 (Ill.App.Ct. 1993) best expresses the rationale which works to defeat the argument of collateral estoppel applied to the legal malpractice case. The court found:


… only a trial on the merits can fully and fairly resolve the issue of whether an attorney is liable for malpractice despite the fact that the underlying case was settled. ….[t]o hold otherwise could create ethical problems where an attorney knowing he mishandled a case, encourages his client to settle in order to shelter himself from a malpractice claim. McCarthy at p. 101.


All other states that have adopted this rationale, See Braud v. New England Insurance Co., 534 So.2d 13 (La.Ct.App. 1988); Zieglebeim v. Apollo, 677 A.2d 1298 (NJ 1992); Baldridge v. Lacks, 883 SW 2d 947 (Mo.App.Ct. 1994); Prande v. Bell, 660 A.2d 1055 (Md.App.Ct. 1995); Cohen v. Lipsis, 92 A.2d 536 (N.Y.App.Div. 1983); Cook v. Connolly, 366 N.W. 207 (Minn. 1985); King v. Jones, 483 P.2d 815 (Ore. 1971); Bill Branch Chevrolet, Inc. v. Burnett, 555 So.2d 455 (Fla 2nd DCA 1990); Fishman v Brooks, 487 NE 2d 1377 (Mass. 1986); and Edmondson v. Dressman, 469 So.2d 571 (Ala. 1985) as some of the more important decisions. In fact, under Prande v. Bell, supra, one of the defenses put forth by a defending attorney is that one of the reason that he recommended settlement is because his client refused to hire certain experts needed to win. The Prande decision appears to prevent that attorney from recommending settlement under such circumstances, and if he does, that attorney can later be sued for malpractice. Of course, the ability to prevail on the malpractice claim may be limited when the client fails to hire a recommended expert, but collateral estoppel cannot be used as grounds for a summary judgment and the jury will get to decide that issue, not a judge.


A Lexis search reveals that there are 52 malpractice appellate cases subsequent to and based on the principles set forth in Grayson (of which 29 are in Connecticut). Limited time and your patience will simply not permit visiting all of these. There are a few that merit discussion.


In Meyer v. Wagner, supra., the Massachusetts Supreme Court agreed with the Grayson ruling that collateral estoppel was not a valid defense to legal malpractice claims arising out of divorce and property settlements. It also found, as so many other states have so found to date, that a jury was best suited to try the issues of legal malpractice. In other words, the normal requirement to show that the sustained injury would not have occurred but for the malpractice is inapplicable to legal malpractice, and the issue is best left for a jury to decide. Other issues raised were the failure to meet a proper standard of care related to property amount issues as well as enforcement of those rights. Similar issues were raised in McWhirt v. Heavey, 550 NW 2d 327 (1996), where the Nebraska Supreme Court agreed with the principles set forth in Grayson as it pertains to a claim of legal malpractice involving divorce proceeding. McWhirt, like Meyer rejected the idea that evidence must be adduced to support the claim that the party was injured, instead, a jury could decide that. Let’s face it ladies and gentlemen, the courts are holding the attorney to a higher standard than doctors are held in malpractice cases, apparently for fear of the appearance of impropriety. In Callahan v. Clark, 901 SW 2d 842 (1995), the Arkansas Supreme Court upheld the Grayson concept for a legal malpractice award based upon failure to value a marital business. One California appellate court found that it was legal malpractice for failure to discover and value a marital pension asset. See Worton v. Worton, 286 Cal.Rptr 410 (1991).


Lynn Epstein, the author of, Post-Settlement Malpractice: Undoing the Done Deal, 46 Cath. U. L. Rev. 453 is highly critical of the Grayson like rulings and she urges courts to reconsider their thinking. I find myself in wholehearted disagreement with her. However, I do not agree that it should be easier to prove legal malpractice than medical malpractice. The two should be aligned and it probably should be done by lessening the burden for proving medical malpractice. The author does make an excellent point on p. 473 of her article. She suggests certain disclosure (shown below) that should precede a recommendation to accept an offer. However, I would certainly remove any mention of malpractice from the disclosure inasmuch as its insertion will lessen the likelihood of settlement and only heighten the client’s awareness of that issue, which is non-productive to either party’s interest.


This statement is not part of the settlement agreement.

A. Status of the Case

1. The relevant facts of your case are ….

2. The following discovery has been conducted…

3. The strengths of your case are …..

4. The weaknesses of your case are ….

5. The fees and costs of your case to date…. until trial ….. through trial ….

6. The likely verdict of your case at trial is ……

7. This figure has been based on ……….

8. You have offered/been offered …… to settle the case….

9. This settlement amount is/is not in the range of settlement cases for your type.

The range of settlement figure is based on ……

B. Your Rights Concerning Statement

You, the client, have the sole discretion whether to accept or reject this settlement. While your attorney may offer you advice as to whether to accept or settle your case, you are not obligated or required to follow your attorney’s advice.

DO NOT SIGN THIS AGREEMENT if you do not understand any of the information provided to you in this statement.


Your attorney is required to answer any of the questions you may have concerning the settlement. If you have any questions which your attorney cannot answer to your satisfaction, you have the right to seek other advice from another attorney of your choice or you may contact the bar association at …. Signing this document does not waive you right to subsequently file a malpractice action against your attorney unless prohibited by state law. However, your attorney may use this document as a defense in a malpractice action if permitted by law.

______________

Signature of Client

__________________

Signature of Attorney


We may have all committed errors in the past. The New Year is a time when we promise ourselves change. Make a New Year’s resolution to change some of these past errors so that each attorney can look forward to a happier and financially healthier future. This concludes this newsletter. This was an especially complicated subject matter for me to write about and it caused me to spend much more time than usual. This topic is by no means concluded. The next newsletter examines malpractice exposure associated with the valuation of pension assets (or failure to obtain a valuation). A third and fourth newsletter on the topic will be done in future years. Your comments are the only way that I know that these newsletters are read and appreciated. You need not agree with what I write. That is unimportant. Your time and appreciation is all that matters.


Jerry Reiss


COPYRIGHT 2004 JERRY REISS, A.S.A. ALL RIGHTS RESERVED. This may not reproduced in whole or in part without the expressed written permission of the author.